Focus On: BRICS Economic Growth Watch Out for the Speed Bumps

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The BRICS economies are running into speed bumps, the International Monetary Fund cautioned recently, announcing that it had downgraded its expectations for global economic growth as the outlook for emerging markets had weakened.

In its latest update to the World Economic Outlook, the IMF cut its global GDP forecast to 3.1% in 2013 from 3.3%. While growth in advanced economies was trimmed from 1.3% to 1.2%, due to Eurozone weakness, emerging markets growth was cut 0.3 percentage point to 5% in 2013.

“After years of strong growth, the BRICS are beginning to run into speed bumps”, warned the IMF’s Chief Economist Olivier Blanchard. Brazil, Russia, India, China and South Africa together account for around 20% of world GDP and 55% of the output of emerging and developing economies.

Challenges AheadIn spite of the slowdown projected for the BRICS, these economies continue to grow at high rates

relative to advanced economies. Investments in infrastructure, education and health are among the key structural challenges in order to sustain economic growth as the size of the middle class grows.

Shorter term, slow recovery in the US and the Eurozone coupled with the weakness in China suggests BRICS growth is likely to remain at current levels throughout 2014.

Possibly the largest threat to the BRICS and other emerging markets stems from the possibility the US Federal Reserve will start tapering their bond purchases. Fed Chairman Ben Bernanke’s June message that stimulus could be reduced caused an about turn in sentiment towards emerging markets with equities falling sharply. While the Fed Chairman has backtracked somewhat on his initial comments, the threat of massive capital outflows from emerging economies looms large.

To succeed in boosting and sustaining growth, the

The Size of the BRICS

Brazil Russia India China South Africa

Population (M) 198.4 141.9 1,223.2 1,354 51.2

GDP 2012 ($B, current prices) 2,396 2,022 1,824.8 8,227 384.3

GDP per Capita 2012 ($ PPP) 11,875.3 17,708.7 3,829.7 9,162 11,375.5

Inflation 2012 5.8 6.6 11.2 2.5 5.6

GDP Growth (Average 2002-2012) 3.5 4.7 7.2 10.3 3.5

GDP Growth: Projection 2013 2.5 2.5 5.6 7.8 2

GDP Growth: Projection 2014 3.2 3.3 6.3 7.7 2.9

Source: International Monetary Fund

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BRICS will need to simultaneously deal with their capacity constraints, the inflation pressures and the effects of financial markets volatility on capital flows and the exchange rate. And as Blanchard made clear, “these countries will not grow at the rate they did before the (financial) crisis”.

China: Slowdown Threat to BRICS GrowthFor China, the second largest economy in the world, the days of double digit growth are over. In the second quarter, GDP rose by 7.5% on the year, down from 7.7% in the first quarter. The IMF estimated that China will grow 7.8% in 2013 and 7.7% in 2014, while the government growth target for this year is 7.5%.

While a growth rate higher than 7% is still healthy when compared to other developing nations, the China slowdown is already having an impact on these economies and the global economy.

Moreover there are growing fears that the credit boom which has financed much of the investment which has propelled Chinese growth in recent years has the potential to burst, adding downside risks to the China outlook.

India: GDP Revised LowerIndia is the second largest of the BRICS not only by the size of the economy but also by population. After the economy expanded modestly in 2012 by 3.2%, the IMF estimated India will expand by 5.6% in 2013 and 6.3% in 2014. The 2013 forecast is 0.2% lower than the April projection. “Policy administrative uncertainty” was cited by the IMF as one of the reasons behind the lower forecast.

Like China, India is growing at a slower pace than the average rate of the last ten years. Nevertheless, it seems that businesses remain optimistic about the path of household consumption, with demographic trends holding the potential for an expansion of demand.

Brazil: Dealing with Inflation and Investment DemandsThe IMF reduced Brazil’s growth forecast to 2.5% for 2013 and 3.2% in 2014. While this is low compared to the average of the last 10 years, it shows a clear recovery after disappointing growth of just 0.9% in 2012.

High inflation and low investment are the main concerns for 2013 and the authorities are clearly aware of the former, with the central bank having hiked interest rates for the third time this year to 8.5%.

Recent protests have seen Brazilians demanding better quality public services, less corruption and more investment in education and health. However, the political reforms proposed by President Dilma Rousseff, together with the promise of higher public investment in social services might not be enough to solve the structural bottlenecks accumulated over the years.

Russia: Weak External Demand Prompts Severe DowngradeThe IMF slashed its growth forecast for Russia in 2013 to 2.5% from 3.4% only a few months ago. According to the IMF, weak investment and weak external demand are constraining economic activity. Structural reform, in particularly in public firms, and increasing investment are key requirements to support growth in the medium term.

South Africa: Only 2% Growth in 2013For 2013, economic growth in South Africa was forecast at only 2%, a 0.8 percentage point downward revision from the April projection. Weak private investment, slower consumer spending and weaker global demand are all set to bear down on growth at a time when unemployment is already at 25%.

The public infrastructure investment programme will support South African economic growth in the medium term.

Focus On: BRICS Economic Growth Watch Out for the Speed Bumps

MNI Indicators - Focus On - July 2013 3

Focus On: BRICS Economic Growth Watch Out for the Speed Bumps

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BRICS Economic Growth: 2000-2014

China

India

South Africa

Brazil

Russia

Projection

-1

0

1

2

3

4

5

6

7

8

WorldOutput

AdvancedEconomies

UnitedStates

Euro Area Japan UK Emergingand

DevelopingEconomies

Russia China India Brazil South Africa

IMF Growth Projections for Major Economies

2013

2014

Source: International Monetary Fund

Source: International Monetary Fund

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Editorial Content: Philip Uglow, Chief EconomistLorena Castellanos, EconomistShigeo Kodama, Economist

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